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High-Impact Events and Realignment
within the Specialty MarketplaceSpecialty pharmacy stays in the spotlight as healthcare stakeholders look
for opportunities to improve quality and better manage costs
October 2016
National Specialty Pharmacy licensed
in all 50 states; 2 Central Fill; 9 Retail;
2 503(b) Compounding Sites; Infusion;
1 503(a) Compounding Site
50+ limited distribution medications
Patient-centric disease focused teams
• Clinical expert access
• Creative adherence
• Patient assistance programs
Integrated medical and pharmacy
benefits program
URAC & ACHC Accredited;
39 Medicaid states, with 70M covered
lives across country
Confidential and proprietary | 3
Key MilestonesMarket shifts that will continue to drive change in the industry
Specialty drug
approvals by the
FDA have exceeded
traditional drug
approvals for the
first time since 2010
- in large part
because of oncology
and orphan drugs /
rare diseases
Drug pricing
pressure builds
from negative media
coverage,
legislators,
presidential
candidates and
consumers.
Expansion of 340B
an opportunity for
both hospitals &
pharmacies.
Increased scrutiny
on specialty
pharmacy/pharma
relationships due
to Valeant, Novartis
cases.
Continued emphasis
on M&A as well as
strategic partnerships
including those
between specialty
pharmacies and
hospitals/payers.
New technologies
continue to be put
into the hands of
providers and
patients.
Specialty
pharmacies get in
on the value-based
care game.
Confidential and proprietary | 4
State of the IndustrySpecialty drug costs by therapeutic class
Projected Specialty Medication Spending PMPM
Medical vs. Pharmacy Benefit
Top 10 Specialty Therapeutic Classes 2016
Therapeutic
Class
Specialty
Medical PMPM
Specialty Pharmacy
PMPM
Total
Specialty PMPM
Inflammatory Conditions $ 3.95 $ 12.30 $ 16.25
Oncology $ 7.56 $ 4.66 $ 12.23
Multiple Sclerosis $ 0.97 $ 5.91 $ 6.88
Immune Deficiency $ 1.87 $ 3.92 $ 5.79
Hepatitis Agents $ 0.00 $ 4.50 $ 4.50
Growth Hormone $ 0.00 $ 1.26 $ 1.26
Cystic Fibrosis $ 0.00 $ 1.15 $ 1.15
Hemophilia $ 0.33 $ 0.79 $ 1.12
Fertility Regulatory $ 0.01 $ 1.11 $ 1.12
Hematopoietic Growth Factors $ 0.37 $ 0.43 $ 0.81
All Other $ 6.41 $ 2.89 $ 9.30
Total $ 21.48 $ 38.93 $ 60.41
% of Total 36% 64% 100%
Milliman Research Report. December 28, 2015. Commercial Specialty Medication Research: 2016 Benchmark Projections.
Confidential and proprietary | 5
Pharmacy Industry RevenuesTraditional vs. Specialty Drugs, 2010-2020
$41 $98
$212
$233
$266
$270
$0
$100
$200
$300
$400
$500
$600
2010 2015 2020
Specialty Drugs Traditional Drugs
$274
$364
$483
(billions)
Figures in billions
Source: Pembroke Consulting estimates
This table appears as Exhibit 34 in: Fein, Adam J., The 2016 Economic Report on Retail, Mail, and
Specialty Pharmacies, Drug Channels Institute, January 2016. Available at
http://drugchannelsinstitute.co/products/industry_report/pharmacy/
Confidential and proprietary | 6
Medication PipelineContinuing to Target High Cost Diseases
The vast majority of the technical development pipeline
Is focused on expensive specialty medications*
*2015 ARMADA Specialty Pharmacy Summit, Clinical Pipeline Presentation
221
2 10 5
343
33
2
55
2
32
7
405
114
213
1 6 4
131
51
2 6 1 5 60
50
100
150
200
250
300
350
400
450
CF CID GH Hep C MS Oncology Orphan
Phase I Phase II
Confidential and proprietary | 7
Late Stage R&D Pipeline by Therapy Areas2,320 novel products
A quarter of the pipeline is comprised of
oncology medicines, of which 25% are indicated
for blood cancers.
Of the over 630 distinct research programs in
Phase II or later research, 37% are for
medicines in the specialty market.
Source: IMS Health, LifeCycle R&D Focus, Dec 2015; IMS Institute for Healthcare Informatics, March 2016
25%
15%
5%4%
51%
0 300 600 900 1200
Phase 2 Phase 3 Pre-Reg / Registered
591
350
115
89
1,175
43-49 NAS/Year Expected by 2020
Oncology
Neurological
Dermatology
Vaccines
All Others
Confidential and proprietary | 8
Oncology Represents the Largest and Fastest-Growing Segment
Oncology
Key Facts and Trends U.S. Specialty Pharma Sales Growth
U.S. Oncology Specialty Pharma Sales Growth U.S. Oncology Specialty Pharma Sales Growth
• Oncology is the largest and fastest growing (10.7% annually
through 2019) segment of the specialty pharma market
• Oncology primed to capitalize on trend towards oral delivery
options as well as higher portion of new therapies focused on
niche patient populations
• Oncology also set to benefit from trend towards smaller LDNs
which results in higher margins and returns
• Oncology represent the largest component (32%) of drugs under
development with over 2,120 drugs currently in clinical trials
• Within Oncology, worldwide sales of the new PD-1 products are
estimated to account for 23% of the segment's overall growth
• 17 new drugs were launched to treat orphan diseases in 2013: 8
of which were oncology
31%
40%
34%
28%
19%
Phase and Total Number
of Drugs
Preclinical (3,229 total drugs)
Phase I (1,007 total drugs)
Phase II (1,487 total drugs)
Phase III (621 total drugs)
Pre-Reg / Registered (203 total drugs)
Other Specialty, 73%
Oncology, 27%
Other Specialty, 67%
Oncology, 33%
2014 ($133 Billion) 2019 ($181 Billion)
Oncology
10.7%
5-year CAGR
Total SP
6.4%
5-year CAGR
Injectable, 63%
Oral, 37%
2014 ($36 Billion) 2019 ($60 Billion)
Oral
12.9%
5-year CAGR
Injectable
7.4%
5-year CAGR
Injectable, 54%
Oral, 46%
Source: SunTrust Robinson Humphrey
Confidential and proprietary | 9
Healthcare’s M&A Boom ContinuesM&A in the specialty pharmacy and healthcare sectors 2016
Strategic Acquisitions Mergers of Equals “MOE”
$13.0B
$15.0B$54.2B
$37.8B
$14.1B
$13.9B
Over past 2 years,
strategic acquisitions have
dominated the healthcare
M&A space
Confidential and proprietary | 10
Specialty Pharma is no ExceptionSpecialty pharmacy continues to be a prime environment for M&A
The entire healthcare
industry is moving
toward great size,
specialty and
consumerism—key
drivers of increased
M&A in specialty
pharmacy.
1 The Braff Group. 2016. Outlook 2016: Broad View Clarifies Specialty Pharmacy, Infusion M&A Activity (with Chart: Specialty Pharmacy Deal
Trends, 2001 Through Third-Quarter 2015).
Other drivers include
reimbursement
pressure and a move
toward greater
integration/reduced
fragmentation across
the continuum.
As a result of all
these factors,
pharmacy sector
remains primed for
horizontal and
vertical integration.
High valuation for
specialty
pharmacies shows
that organizations are
willing to pay more for
the value these
companies can
bring.1
01 02 03 04
Confidential and proprietary | 11
2016: Year of Change for Specialty PharmaM&A as well as strategic partnerships with health plans, hospitals dominate the landscape
In late August, Walgreens Boots Alliance and Prime Therapeutics
rolled out a long-term strategic partnership. It aligns a pharmacy
benefit manager (PBM), retail pharmacy chain, and health plans via
joint ownership of a new mail and specialty pharmacy company.
1 The Braff Group. 2016. Outlook 2016: Broad View Clarifies Specialty Pharmacy, Infusion M&A Activity (with Chart: Specialty Pharmacy Deal
Trends, 2001 Through Third-Quarter 2015).
Thanks to its acquisition of two specialty pharmacies from Lincare
Holdings, GPO Premier will make these pharmacies’ services
available directly to its hospital and health system customers.
Infusion therapy companies remain prime targets for private
equity and specialty pharmacies. Through the first three quarters of
2015, the most recent data available, there were already more deals
in the infusion therapy sector than there were for all of 2014 — 11
vs. eight.1
Confidential and proprietary | 12
Specialty Pharma Deal TrendsSource: The Braff Group
0
5
10
15
20
25
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Specialty Rx Deals 9 Months 2015 Annualized
Source: The Braff Group. Visit www.thebraffgroup.com
Confidential and proprietary | 13
Hospital / Pharmacy AlignmentHospitals and specialty pharmacy partnerships show potential to improve quality of care alongside revenue.
› Alongside the M&A boom, greater collaboration is also
happening across the healthcare continuum, including
partnerships between hospitals and specialty pharma.
› Hospitals aiming to provide high-quality, comprehensive care for
patients with complex, chronic conditions that are typically
treated with specialty medications.
› Drug-related issues are a leading cause of hospital
readmission1, meaning that hospitals have an opportunity to
reduce penalties for readmission through close collaboration with
specialty pharma.
› These partnerships can also drive profits through the
acquisition of discounted specialty drugs under the 340B Drug
Pricing Program (for qualified entities/contracted pharmacies).
› Hospitals are either pursuing partnerships with leading
specialty pharmacies for 340B, including Avella, or forming in-
house specialty pharmacies to dispense these drugs directly.
1 Davies EC, Green CF, Mottram DR, Rowe PH, Pirohamed M. Emergency re-admissions to hospital due to adverse drug reactions within 1 year
of the index admission. Br J Clin Pharmacol. 2010;70(5):749-755.
Confidential and proprietary | 14
The Trend toward Hospital DispensingHealth systems make a move to develop in-house specialty pharmacies
› Approximately 1 in 5 hospital systems now
have some form of specialty pharmacy
program.
› Others are seeking services through the
GPO sector. Through its M&A activity,
Premier is positioned to offer specialty
pharmacy services to 3,600 hospitals.
› Examples of large systems with URAC-
accredited pharmacies include:
› Carolinas HealthCare System - the 2nd
largest not-for-profit public healthcare
system in the nation
› Fairview Health System - Minneapolis-
based integrated health system
› Vanderbilt University Medical Center -
48 hospital locations, with 26 pharmacists
embedded in 20 different clinics
› Other notable entrants into this market are
Cleveland Clinic, Rush University Medical
Center, St. Jude Children’s Research
Hospital, the University of Illinois Hospital
and Health Sciences System, and Duke
University Hospital
Confidential and proprietary | 15
The trend toward Hospital Dispensing, cont.Challenges with the in-house pharmacy approach for hospitals and health systems
› No access to many limited distribution
drugs - health systems’ specialty
pharmacies have struggled to penetrate
manufacturer- and payer-defined limited
specialty pharmacy networks.
› Specialization required optimizing health for
patients with certain conditions may not be
possessed by in-house team and it is
extremely difficult to manage competing
priorities across the hospital pharmacy
environment.
› Specialty pharmacies are much more than
just dispensing: many hospitals lack the
organizational focus needed to manage
and administer everything from adherence
programs to prior authorizations.
› Leading specialty pharmacies maintain
advanced analytics and technologies
designed specifically for this sector—aiming
to improve adherence, analyze gaps in care
and promote improved outcomes.
Confidential and proprietary | 16
340B Opportunity, Challenges & OutlookComplex challenge, but with potential opportunity
TPA
Health Plan / PBM
Covered
Entity
Total paid net of disp fee
and admin fee
Pharmacy WAC net of
$X dispense fee XX/Rx
Contract
Pharmacy
Patient Paid
Plan Paid
Replenished Product Wholesaler 340B Cost
Invoice
Data FeedsClaims
Confidential and proprietary | 17
340B Pharmacy ServicesBenefits & Burdens of 340B outsourcing
› Partnering with a 340B pharmacy can
generate significant revenue and increase
access to LDDs. Active pull through
messaging will minimize leakage and
improve member adherence
› 340B is incredibly complex -involving
designated 340B pharmacies, third-party
administrators & data analytics.
› 340B is new to hospital pharmacy, third party
administrators of 340B and patient
coordinators. Steep learning curve.
› Third Party Administrator (TPAs) systems
were built for retail, do not accommodate
SRx well, resulting in low capture rates.
› Replenishment of high value LDD/drop ship
drugs is a challenge.
› The use of 340B contract pharmacies
allows covered entities (including an
expanded list of hospitals and clinics thanks
to the ACA) to benefit from drug discounts
designed to help them better serve needy
populations.
› 8,000 pharmacy locations contract with
340B-eligible covered entities; more than one
in four U.S. retail, mail, and specialty
pharmacy locations. There are ~1,300 unique
DSH parent covered entities generating
70% of SRx.
› According to the American Hospital
Association, hospitals save $1.6 billion to
$3.8 billion per year in COGs through this
program.
Confidential and proprietary | 18
Payers and ACOs Seek Specialty Pharma PartnershipsOther trends keeping SP in the spotlight among at-risk organizations
Nearly half of all specialty drug
spending occurs under patients’
medical benefit coverage, enabling
payers to look for new ways to
promote affordable therapies while
also improving care coordination
and population health.
Contributions from this sector can
include medication adherence
programs, outcomes programs,
data sharing, coordination at the
point of care (in “the white space”
between physician office visits) and
a focus on holistic patient health.
Untapped opportunities exist
within more formalized value-
based care models (including
ACOs) and outcomes-based
contracting.
Specialty pharma is ideally-
positioned to help at-risk entities
meet the “triple aim” (improved
quality, reduced costs, greater
patient satisfaction).
Specialized ACOs focusing on
conditions like oncology have a
natural alignment with the goals of
specialty pharma. In addition, new
oral oncolytics are shifting cost
that used to originate from
providers to specialty
pharmacies—and payers are
optimizing cost control efforts
accordingly.
Confidential and proprietary | 19
The Financial Implications of Cancer
*Source: Milliman, 2010; study of total PMPM costs for ~14mm commercially-insured lives; assumes 11 member months per member
** Source: Yabroff, 2011; 2020 figures depicted in 2010 $’s
*** Adjusted for recent trends in dx incidence, survival, and cost
Cancer represents less than 1% of the population, yet drives over 8% of the total cost of care
Cost of Care – Cancer v. Non-Cancer (PMPM) ($)*
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
Cancer Dx + ActiveChemo Tx
Cancer Dx w/oActive Chemo Tx
All Non-Cancer
$0
$10
$20
$30
$40
$50
$60
Bra
in
Bre
ast
Colo
recta
l
Kid
ne
y
Leukem
ia
Lung
Lym
phom
a
Ovarian
Pro
sta
te
Oth
er
2010A
2020E
Total Expenditures (2010A): $124.5
Total Expenditures (2020E): $157.7
Total Expenditures (Adjusted) (2020E): $172.8***
National Health Expenditures – Oncology (US) ($ in bn)**
Confidential and proprietary | 20
ACO Oncology Cost Management
AETNA'S TOP COST DRIVERS
IN CANCER CARE
TRADITIONAL PAYER MANAGEMENT
TECHNIQUES AIMED AT ADDRESSING
SPECIFIC COST CATEGORIES HAVE NOT
WORKED IN ONCOLOGY:
Physician Reimbursement:
Pay Less for Services and Drugs
Prior Authorization:
Increase Management on Drugs and Diagnostics
Altern4ate Channel:
PBM / Specialty Pharmacy / Mail Order Pharmacy
Benefit Design:
Shift Responsibility to Patients by increasing copay /
deductible
Source: IOM (Institute of Medicine). 2014. Ensuring patient access to affordable cancer drugs: Workshop summary.
Washington, DC: The National Academies Press. Kolodziej presentation, June 9, 2014; 2010 CY claims; commercial and Medicare;
all funding; www.cancer.gov/newscenter/newsfromnci/2011/CostCancer2020 (accessed August 20, 2014).
ACO’s and Hospital Systems must implement an integrated approach to effectively
manage the quality and cost of cancer patients
Growth Spend
Medical Rx 30.8% $1.5B
Inpatient 23.3% $1.1B
Radiology 22.4% $1.1B
Specialist
Physician9.4% $483M
Confidential and proprietary | 21
Oncology Payment ReformEngaging physicians to shift from volume to value
Current Models
To
tal C
ost
of
Ca
nce
r C
are
Future Models
FFS Payments
to Physicians
All Other Cancer Care
Spending Elements
Waste and inefficiency
FFS Payments to Physicians
All Other Cancer Care
Spending Elements
Waste and inefficiency
New Physician
Services Payments
Source: Brookings Institution, Transforming Oncology Care: Payment and delivery reform for person centered care, May 19, 2015
o Reimbursement focused on clinical quality and outcomes (Not on volume and drug margins)
o All care must exceed minimum clinical and quality measures (Pathways / Guidelines)
o Comprehensive patient performance and quality reporting
o Transition performance risk to providers (upside / downside)
Confidential and proprietary | 22
Oncology Payment Reform
• Launched in 2015 / 2016
• Pilot Sites / Diseases• MD Anderson – Head / Neck Cancer
• Moffit – Early Stage Lung Cancer
• Three Year Pilot Program
• Objectives: • Identify a small sub-group of cancer patients
• Establish a contract (bundle payment) to provide
all necessary care for those patients
• Preliminary Observations • Initial pilot sites are large academic medical
centers have the necessary clinical,
management, financial and information systems
resources necessary for implementation.
• The initial disease categories have well establish
treatment guidelines with limited variability
• Likely developed a clear approach for the
utilization and reimbursement of drug therapy
CMMI
Oncology Care Model (OCM) Pilot
United Healthcare
Bundle Payment Pilot
• Launched in July 2016
• 199 Participating Organizations (Mostly
community based oncology practices)
• Objectives:• Adherence to evidence based guidelines
• Enhanced patient management & care
coordination
• Eliminate redundant / low value care
• Reduce avoidable complications and hospital
admissions
• Model Summary:• FFS payments (E/M & Drugs)
• Modified FFS payment (MIOS)
• Phase 1: Meet minimum clinical, operational,
and technological standards
• Phase 2: Financial Gain Share based on a
reduction to total cost of care
• Preliminary Observations: • Primary focus on reducing hospital costs
• Requires significant operational and IT system
changes
• Difficult to deal with Total cost of care
• Timely Patient data & information is lacking
Cost management vs. risk transfer
Confidential and proprietary | 23
Direct and Indirect Remuneration (DIR) Fees
› Final 2014 Part D rule established a new
definition of “negotiated price” effective in
2016 to include all pharmacy price
concessions which can be reasonably
determined at point of sale.
› Similar types of pharmacy fees are starting to
be reported even in commercial markets.
This means more patients may face higher
drug costs (especially those with high
deductible plans) than if they were paying
cash prices.
› Plans / PBMs restructured programs for 2016 to
make it more difficult for their DIRs to be
“reasonably determined” in anticipation of
this legislation
› Term coined by CMS related to Medicare
Part D benefit to address price concessions
that would ultimately impact the gross
prescription drug costs of Medicare Part D
plans that were not captured at the point
of sale.
› Used as a “catch-all” term to encompass a
number of different types of fees including
“pay-to-play” fees for network participation
› Term “DIR fee” may be used by PBM so they
can make assertion that these fees cannot be
determined at the point of sale
Confidential and proprietary | 24
InnovationNew SP technologies support existing efforts to promote adherence, clinical decision support
1 Siwicki, B. 21 September 2016. Waning mHealth security fears are opening doors to app and device innovation. Healthcare IT News. 2 Global Telemedicine Market – Growth, Trends and Forecasts (2016-2021). August 2016. Mordor Intelligence.
Mobile adherence apps for patients
are an easy, non-intrusive way to
help patients remember to refill, take
drugs appropriately. 50% of
consumes are already using a
healthcare app of some kind.1
Mobile and web-based apps for
providers to empower informed
prescribing decisions, especially in
areas where these decisions are
increasingly complex (oncology,
hepatitis C).
Web-based provider portals enable
tracking of patient adherence and
prescribing activity, encouraging
greater collaboration between
pharmacist and physician.
Data analytics and advanced
reporting to drive population health
at the payer level, or care
coordination at the provider level.
Greater connectivity between SP
systems and provider EMRs may
be the final frontier in data sharing
between these entities.
Some pharmacies exploring the use
of telemedicine to improve care
coordination and patient
education/outreach. (The global
telemedicine market is expected to
expand at a compound annual
growth rate of 14.3% over the next
five years, eventually reaching $36.2
billion.)2
Confidential and proprietary | 25
› Novartis and Valeant cases have had widespread
implications for specialty pharmacy contracts.
(Manufacturers want to avoid even the hint of
inappropriate relationships in copay programs, etc.)
› Concerns about the opioid epidemic will drive
development of innovative pain medications and
increased caution around pain management in
oncology and other specialties.
› Negative media and consumer focus on drug
pricing, traditionally focused on manufacturers, could
spread to specialty pharmacies in spite of the fact that
pharmacies have no control and limited margins within
existing pricing structures.
• This trend reached another peak in 2016 with the coverage
around EpiPen profits and pricing structure as well as the
company’s recent Medicaid settlement.
• Scrutiny of 503c copay foundations and the role of
manufacturers
Other trends
that made
2016 a year of
change
Increased scrutiny on
pricing and partnerships:
negative attention from
media puts pressures on
manufactures, impacts
pharmacy contracts.
Confidential and proprietary | 26
› Medicare Part B demonstration project may see the
light of day in spite of controversy and push back from
providers—but most experts say it’s unlikely to succeed
in a meaningful way.
› States including VA and CA have sought regulation
seeking the authority to approve large price hikes
from drug manufactures. In CA, manufacturers must
justify raising prices by more than 10 percent. In VA,
lawmakers have voted to delay consideration of a bill
that would require justification for drugs costing more
than $10k.
• 10 other states are considering the development of similar
legislation.
› The presidential race could also impact regulatory
environment and pricing as it has become a talking
point during many speeches.
• Hillary Clinton has promised to create aggressive new
enforcement tools to levy fines and impose penalties on
manufacturers for “unjustified” price hikes.
Other 2016
trends and
hot topics for
media
Increased scrutiny on
pricing and partnerships:
negative attention from
media puts pressures on
manufactures, impacts
pharmacy contracts.
Confidential and proprietary | 27
Ongoing TrendsWhat to watch for in 2017 and beyond
• Outcomes-based contracting and
specialty pharmacy’s role in ACOs
and other value-based care models
will continue to grow.
• The structure of
manufacturer/specialty pharmacy
agreements will change based on the
high-profile events like the Novartis
case and its settlement.
• Tight formulary management and
increased emphasis on prior
authorizations from payers to control
HCV, oncology costs.
• M&A activity will continue at the
same unprecedented rate across all
of healthcare—from health systems to
payers and pharma.
• Biosimilars will continue to be
among the proposed fixes for pricing.
• Concerns over drug pricing,
sensitivity around SP/manufacturer-
sponsored provider programs.
• Specialty pharmacies will continue
to increase penetration in the
oncology space.
Example: ESI limiting physician dispensing
of Celegene products
Confidential and proprietary | 28
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Rebecca M. Shanahan, JD
CEO